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In previous posts, I've mentioned serious fiscal problems that
need to be addressed at state and local levels. This varies by
region and some issues are potentially solvable.

I live in Illinois, which is ground zero for fraud, corruption,
underfunded pension funds and general fiscal mismanagement. It's
an example of one of the worst fiscal messes in the United
States. This year Illinois hiked personal income taxes from 3% to
5%, and increased corporate taxes. We'll be slammed with hidden
tax increases in utilities, purchases, and more. When now Mayor
Rahm Emanuel left his post as White House Chief of Staff to run
his election, the Chicago mayoral race centered partly around
steps, including budget cuts, needed to solve Chicago's serious
fiscal issues: See "Third World America: Drowning in
Debt and Choking on Lies," Huffington Post, June 24,
2011, and 'Fast-Tracking to Anarchy;"
August 25, 2010.

On December 19, 2010, I was (at first) happy to see 60
Minutes highlight fiscal problems of states and
municipalities. It explained how Illinois was late on payments to
service suppliers, and it's a huge problem for people doing
business with the state. The state's pension fund is underfunded
and although 60 Minutes didn't mention it, state pension
funds are the prey of Wall Street cronies that stuff them with
losses and then propose fee-loaded leveraged financial products
that are bets to make up the shortfall. Then 60 Minutes
went completely off the rails by suggesting that these problems
would lead to widespread defaults on municipal bonds in 2011. You
can still view the segment, "State Budgets: Day of
Reckoning," on the CBS web site.

A "Performance"

Instead of focusing on the implication of these problems to
public services including police protection, fire departments,
city maintenance, and city jobs (among other things), 60
Minutes let a pundit claim these problems translate into
near-term massive municipal bond defaults. Meredith Whitney, the
pundit, had written a report, "Tragedy of the Commons," which
supposedly backed her claims.

Contrary to 60 Minutes's assertion, Meredith Whitney, a
banking analyst, did not have a great track record. Gullible
reporters had given her great PR for an October 31, 2007, call on
Citigroup that had been correctly made many months earlier in her
presence by my friend Jim Rogers, a legendary investor. They
appeared on television together, and at the time she refuted
Rogers. I was later bemused to see that either she or her PR
flacks apparently took credit for my early warnings about serious
problems at AIG. (See: "Reporting v. PR: Meredith Whitney
and AIG," TSF, March 23, 2009.)

Whitney was quoted as
claiming: "Clients are not pleased with my call and I have had
several death threats." A 2008 Fortune cover story
reported she had received "one death threat." (Perhaps clients
were displeased that her ignoring Rogers had already cost them
thirteen points and even then she didn't directly tell people to
bail out.) With characteristic humor Rogers quipped: "Gosh, I have
never received a death threat ever for saying I was short a stock
or that a company would be going bankrupt. What have I been doing
wrong?"

Whitney told 60 Minutes: "You could see 50 sizable
defaults. Fifty to 100 sizeable defaults. More. This will amount
to hundreds of billions of dollars' worth of defaults....It'll be
something to worry about within the next 12 months."

A Wild Guess

Subsequently, Whitney wouldn't justify her analysis saying
"Quantifying is a guesstimate at this point." ("Whitney Municipal-Bond Apocalypse
Short on Specifics," by Max Abelson and Michael McDonald,
Bloomberg News, Feb 1, 2011.) 60 Minutes
admitted it had never reviewed her much-touted report. The report
never mentioned sizable defaults, only that there "invariably"
would be defaults. Bloomberg also reported that 60
Minutes was wrong about her "untarnished' track record.
Since she started her company in 2009, about two-thirds of her
stock picks underperformed market indexes. A 2008
Fortune cover story ranked Whitney 1,205th out of 1,919
equity analysts the previous year, based on stock picks.

Whitney told Bloomberg's reporters: "A lot of this is, you know
it, but can you prove it? There are fifth-derivative dimensions
that I don't think I need to spell out to my clients." As a
derivatives expert I can attest that this is gibberish. But I
want to hear her explanation of "fifth-derivative dimensions,"
because I adore a good belly laugh.

Genuine Research via Bloomberg

Bloomberg is also the financial news service that has
done great early work on fraud and related municipal bond
defaults, because that's a worthy story. Municipal credit issues
are granular and the severity of the problem -- or non-problem --
depends on the specific situation.

In September 2005, Bloomberg broke a story about
Jefferson County's hair raising problems, "The Banks that Fleeced Alabama," by Martin Z.
Braun, Darrell Preston and Liz Willen. According to the article,
"taxpayers blame the $160 million in fees JPMorgan Chase and
other banks have charged to arrange the county's financing--in
deals that were never put out to bid." This year, Jefferson County filed for
bankruptcy.

As the year wore on, Meredith Whitney waffled and by May she told
a Bloomberg radio host: "In the cycle of this municipal
downturn, I stand by it. But we never had a specific estimate for
that." Fortunately, Joe Mysak, a Bloomberg print
reporter, exposed that for the nonsense it was. Whitney had
indeed given a one-year time frame on 60 Minutes and had
called for hundreds of millions of dollars in defaults with 50 to
100 or more sizable defaults. ("Meredith Whitney Trips Over Her
Muni Default Tale," May 19, 2011.)

A Stellar Performance

Whitney's prediction of "hundreds of billions" of defaults was
way off the mark. Even with Jefferson County's $943 million
filing, defaults for 2011 were down from 2010. Bonds that dipped
into reserves to make payments totaled only $24.6 billion
according to Richard Lehmann, publisher of the Distressed Debt
Securities Newsletter. Defaults defined as bonds that missed
payments are down to only $2.1 billion from $2.8 billion in 2010.
In 2011, municipal bonds had stellar performance as an asset
class returning more than 10% of potentially tax exempt returns.
They beat the S&P, treasuries, corporate bonds and most
commodities. ("Whitney's Armageddon Belied by
'11 Returns," by Martin Z. Bruan, Bloomberg News,
December 16, 2011).

CNBC Schools 60 Minutes

As for the actual analysis in Meredith Whitney's "Tragedy of the
Commons" report, it seems that it had serious flaws, at least
when it came to Nevada.

Nevada State Treasurer Kate Marshall appeared on CNBC to debunk
Whitney's claim that Nevada's municipal bonds were troubled.
Marshall challenged Whitney's analytics saying (among other
things) that Whitney apparently misinterpreted a PEW report on
pension plan liabilities. Nevada only represented 1/16th of the
plan, and state employees pick up half the tab. Marshall then
explained why Nevada's municipal bond claims paying ability is
much better than it would appear to the casual observer. The
economy was still tough, but Nevada managed in anticipation of
the ongoing crunch. Property tax revenues dropped, but sales tax
revenues were up, gambling revenue was up, and business modified
tax revenues were up. Her cash position in June 2011 was much
better than 2010.